Not so fast

BRAZIL ECONOMICS - Report 12 Jan 2026 by Alexandre Schwartsman, Cristina Pinotti and Diego Brandao

The disinflationary process observed in 2025 was largely driven by the strong appreciation of the real and favorable food price dynamics. Going forward, the Central Bank will have to bring inflation back to target through the ongoing slowdown in activity and through a weakening of the labor market, which remains resilient. The employment rate, which is not affected by movements in the participation rate, has indeed shown some signs of a loss of momentum in employment, partially reversed by a one-off increase in November. However, our Phillips Curve estimates indicate that the unemployment rate is a better determinant of wage dynamics than the employment rate. As unemployment remains at historically low levels, there are still no clear signs of a reversal in wage pressures. We therefore believe that inflation, although expected to decline in 2026, will not do so as quickly as suggested by the Copom’s recently released projections.

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